This is how CRE can help you build a dream corpus for retirement!

Authored by Sudarshan Lodha, Co-Founder & CEO, Strata

The term ‘retirement’ evokes a flurry of emotions that can potentially swing to extreme ends. While relaxation and a sense of achievement may be gratifying, the imminent need of protecting the financial future of yourself and your loved ones may turn out to be overwhelming. An ideal retirement plan should not just aid in securing your future finances but also, help you kick off your second innings in style – empowering you to fulfil all your ‘I wish I could’ goals nurtured through the course of your life. 

Unlike earlier, today, there is an increasing awareness to start building one’s retirement corpus at an early age. The age of 60 is no longer a benchmark for retirement as people today are eyeing to retire early, which is why building a robust retirement corpus, becomes even more pertinent. Moreover, the pandemic altered retirement planning forever; it has triggered a ‘retirement rethink’, which is why conventional investment avenues such as bank FDs, PPFs, mutual funds, and term plans are being revisited by many.  

One of the critical headwinds that one is racing against when planning for retirement is inflation! Today, accumulating a retirement corpus in a savings bank account may not really help as inflation will devalue it significantly by the time you may actually need it. Likewise, considering the ongoing market volatility and investor sentiments, traditional investment avenues no longer seem to offer lucrative returns to contribute handsomely to one’s retirement corpus.  

How to invest in CRE? 

One can preferably invest in a commercial real estate (CRE) asset either by buying REITs or through the fractional ownership model.  

REITs – Real Estate Investment Trusts or REITs are the companies that deal in the purchase, management, or financing of real estate. They operate much like a mutual fund, where the investment is divided across multiple assets and while one can choose the REIT, one cannot pick the individual assets. 

Fractional ownership – The fractional ownership model gets like-minded investors to pool their investments to own an asset. It thus reduces the exorbitant value of the ticket size attached to CRE thereby, facilitating large-scale retail participation. It also enables portfolio diversification whereby, one can seamlessly pick assets by choice. Pre-decided rental income and capital appreciation are two sources of income under this model. 

Why CRE should be a part of your retirement portfolio? 

Passive income – Commercial properties, due to their nature, are generally leased for a longer period of time thereby, offering a stable passive income. Investing in multiple such properties can create a steady source of income over the years, (anywhere in the range of 8-12 per cent), which can help build a robust retirement corpus. Besides, passive income actually frees up your time for looking at other investment avenues.  

Consistent returns – In the case of CRE, consistency is a huge add-on since lease periods can range up to 20 years, which augments the strength & credibility of the asset class, especially when compared to other investment avenues. A long-term investment goal backed by consistent returns is the key value proposition of CRE and it perfectly complements the retirement portfolio strategy. 

Capital appreciation – While superior rental income can be a major reason for investor attraction towards CRE, the inflation-led capital appreciation of commercial properties over the long-term and demand-led appreciation for high-growth sectors can be much more rewarding. Additionally, in dense real-estate markets and commercial hubs, the positive demand-supply dynamics further contribute to price appreciation, especially over a long-term horizon, as in the case of retirement planning. 

Transparency – New-age investment models such as REITs and fractional ownership, offer a great degree of transparency, unlike other asset classes. Expected rental income, internal rate of return (IRR), and projected appreciation are clarified right at the beginning of the investment, helping investors accurately gauge their goals & expectations, and accordingly, invest in the right asset.  

Low risk – Coming under the ambit of real estate, commercial real estate (CRE), as an asset type, has remained fairly insulated from the ups & downs of the market. Even during the uncertain times of the pandemic, CRE was among the few asset classes that were not just guarded against volatility but were also quick to embark on the recovery path vis-à-vis others.  

Besides the resilience factor, the asset class has also been a robust haven for investors offering them protection against inflation, which has been a huge concern especially when it is about a long-term investment such as retirement planning.  

Below are some of the ways in which CRE protects against inflation: 

a)    Rental income rising in parallel to inflation 

Inflation means the purchasing power of cash falls and everything goes up in price, which includes rental income as well. Property rental rates increase while operating expenses stay stable, contributing to increment in property values. Additionally, an increase in net operating income will appreciate the property values further and as long as this value is on the higher side vis-à-vis inflation, the investment in the asset remains insulated. 

b)    The lease agreement  

The lease agreements in CRE are structured such that the rentals are raised innately at regular intervals throughout the lease term, based on the conditions agreed upon. The clause may differ based on the nature of the property, location, demand-supply dynamics, etc. As long as these rentals powered by regular hikes outperform the inflation rate, the yields can stay positive. 

Be it any form of instrument i.e. equity, gold, fixed deposit (FD), mutual funds (MFs), or real estate among others, besides the risk-return matrix, investors should also be mindful of their investment goals, time horizon in hand ahead of retirement as well as the time they can afford to have their money invested in. CRE is a typical long-term investment that steadily facilitates wealth creation through rental returns and capital appreciation. It, thus, ticks all the boxes and is definitely one of the best assets to park your money, especially for a long-term horizon, and therefore, is a must-have in your retirement portfolio.